Demon-etisation: India opens with a fanfare the ball of the fiscal QEs (GEAB, Dec 2016)

Since November 8, 2016, India has created a monetary revolution of a magnitude never seen, both by the size of the population concerned and the depth of the transformation induced. By demonetising the biggest notes of 500 and 1000 Rs (rupees), the Indian government is trying to reintegrate into the official economy the state’s gigantic parallel (or black or more simply the archaic) economy. In a nation where 90% of the transactions are made in cash, a huge part of the financial activity escapes the knowledge of the central government, and therefore statistics, taxes and infrastructure financing.

Blue: volume; red: value. Source: Bloomberg.

Warning signs

There is nothing new in the fact that the central government tries to force its population to declare their wealth. For example, between 1951 and 1997, no less than ten amnesty projects had been launched, encouraging citizens to declare their unofficial income in exchange for a simple payment of some increased tax[1].

Perspectives

Demon-etisation: India opens with a fanfare the ball of the fiscal QEsSince November 8, 2016, India has created a monetary revolution of a magnitude never seen, both by the size of the population concerned and the depth of the transformation induced. By demonetising the biggest notes of 500 and 1000 Rs (rupees), the Indian government is trying to reintegrate into the official economy the state’s gigantic parallel (or black or more simply the archaic) economy. In a nation where 90% of the transactions are made in cash, a huge part of the financial activity escapes the knowledge of the central government, and therefore statistics, taxes and infrastructure financing. (Read more – GEAB 110).Warning signsThere is nothing new in the fact that the central government tries to force its population to declare their wealth. For example, between 1951 and 1997, no less than ten amnesty projects had been launched, encouraging citizens to declare their unofficial income in exchange for a simple payment of some increased tax[1]. (Read more – GEAB 110).The detail of the demonetisation processBut the operation of demonetising the 500 and 1000 Rs banknotes on November 8 (in the middle of the US election) over a period of 50 days (until December 30) was not expected. This produced a real shock, especially knowing that these notes account for 86% of the liquid circulating in India; meaning an amount of Rs 14 lakh crore (or 14 trillion rupees[4]) being withdrawn from the cash in circulation. (Read more – GEAB 110).But what if it worked?There have already been demonetising actions of this kind, many of which were total failures. Particularly: the Nigerian case (1984, failed); Ghana (1982, failed: people turned to foreign currencies and physical assets); Myanmar (1987, failed: it led to riots and repressions); Zaire (1990, failed: it caused inflation and a collapse of the local currency against the dollar); North Korea (2010, failed: combined with a poor harvest it lead to food shortages); Soviet Union (1991, failed: it caused a loss of confidence and the eviction of Gorbachev) [15]. (Read more – GEAB 110)

Telescope

Chinese debt, global debts, interest rates: the insolvent countries no longer have friendsAs we have already discussed and explained before, the crisis is now taking a more geopolitical form. Does this mean that the economic-financial crisis is over? No one will accuse us of having pretended that. If need be, we can confirm that the crisis is always there, always vivid, and it is in perfect shape after more than eight years of existence, thank you very much… (Read more – GEAB 110).African Union: One road, One continent, One currency. The end of the CFA francAfrica! The second largest continent in the world after Asia, both in size and population, and also one of the poorest is shaken by internal conflicts and wars. But above all, it’s a continent with one of the youngest age pyramids in the world … (Read more – GEAB 110)

Focus

An evaluation of our anticipations for 2016 (drawn from GEAB n° 101 of January 2016): 75% successEach year in December, we evaluate our trend anticipations made in January. This month, we come across a final score of 25.5 out of 34, meaning a 75% success rate; two points more than last year. The year 2014 and the great turmoil caused by the Euro-Russian shock that drove us below the 70% success at that time, seems to be reconciled with. We can claim an average success rate of 73% – between 2012 … (read more – GEAB 110).Investments, trends and recommendations. Infrastructure versus sovereign bonds. Financial systems: Diversify!. Investment: African green bonds. Alert on Gold: state loot!